WALTERS: So you have a fascinating resume. Let -- let me -- and just in case some people don't know it. At 12 you were arrested for shop lifting?

BROWN: Right down the street.

WALTERS: You remember the place? OK.

BROWN: I do.

WALTERS: At 22 you posed nude for Cosmopolitan Magazine. For the past 30 years you've been in the National Guard, and you have the rank of Lieutenant-Colonel. The past six years you've been a state senator, and now as the newly elected Republican senator from Massachusetts. You are the new star. I just saw that when I traveled a little bit with you.

What do you most want to accomplish? What's your passion?

BROWN: Well let me tell you what I'm most proud of. First of all that's being married for 23 years, and having two great kids. And I want to accomplish what I think is already starting to happen, which is to bring good government back to the equation. Have people come together and talk about issues out front -- transparent, and not behind closed doors. And I think that's happening as evidence – what happened with the president yesterday.

WALTERS: Well you know there was -- when the president had the meeting with the Republicans. And that back and forth. And the president talked about the fact that both sides demonized the other. But it seems to be working for the Republicans. Are you -- do you feel pressure that as the 41st you'll have a tough time voting Republican all the way?

BROWN: Everyone really is the 41st senator. And what it means is that now there will be full and fair debate. And there will be no more closed -- behind closed doors actions.

And make no mistake, I am a fiscal conservative. And when it comes to issues affecting people's pockets, and pocketbooks, and wallets, I'll be with the Republicans if they are in fact pushing those initiatives.

WALTERS: It has been said all over the country that your election was more about disappointment in the president than it was about voting for you in particular.

BROWN: I have to respectfully disagree. People here spoke very loudly and -- and very plainly about taxes and spending, terrorism, and the health care proposal.

WALTERS: Which means you -- which you represented?

BROWN: That's correct.

WALTERS: Yes. You know when I was with you just a little while ago with the crowd, one of the women said -- behind me -- said, "President 2012." And you said to me -- or under your breath, "That's silly." But do you rule it out?

BROWN: I -- I have to -- I have to tell you, I don't even have a business card. I haven't even been sworn in. I don't have any exploratory committees started. I don't have any -- anything -- it's -- it's overwhelming, and it's extremely humbling. I don't know how -- what else to tell you.

WALTERS: Let's talk about another rising star in the Republican party -- Sarah Palin. Do you think that Sarah Palin is presidential material?

BROWN: Well -- well, sure. I mean, she's been a mayor, and a governor. And -- and has a lot of -- a national following. But I think the more people in a presidential race, the better. She's never contacted us, and vice-versa.

WALTERS: Let's talk about some of your specific views. You are pro-choice, yes?

BROWN: Yes.

WALTERS: And gay marriage is legal in the state of Massachusetts. But the Republican party platform language calls for the overthrow of Roe v. Wade, and they want a federal ban on gay marriage. Are you out of step with your party, or do you think that the party has to broaden, and change its platform?

BROWN: Well I've always been a big tent person, you know? We need more people to come into our tent to express their views in a respectful and thoughtful manner.

And, you know, Roe v. Wade is the law of the land, but I think we need to do more to reduce the amount of abortions. And the difference between me and maybe others is that I'm very -- I'm against partial-birth abortions. I'm against federal funding of abortions. And I believe in a strong parental consent notification law.

And we should do more for adoptions.

WALTERS: But you're still pro-choice?

BROWN: Yes, because I feel this issue is best handled between a woman and her doctor and her family. And on the marriage issue that you brought up, it's settled here in Massachusetts, but I believe that states should have the ability to determine their own destiny and the government should not be interfering with individual states' rights on issues that they deal with on a daily basis.

WALTERS: Well, there is the debate now in the Republican Party as to whether it should be more conservative or more moderate. Which direction do you bend?

BROWN: They can do whatever they want. I just know that I'm a Scott Brown Republican. What does that mean? That means I'm going to go down there and be accountable, accessible, open, and honest, and I'm going to bring good government and fairness back to the equation.

I'm a fiscal conservative. I care very deeply about -- because my mom was, as you probably know more than anybody is, you know, she was on welfare for a time. I remember getting the blocks of cheese and worrying about how we're going to pay the bills.

So when it comes to fiscal issues, I'm going to be very, you know, conservative and concerned about people's dollars.

WALTERS: And social issues, a little more moderate?

BROWN: Yes, of course.

WALTERS: The Tea Party movement was important to your victory. How influential do you think the Tea Party movement is going to be?

BROWN: Well, you're making an assumption that the Tea Party movement was influential, and I have to respectfully disagree. It was everybody. I had a plurality...

WALTERS: But it was part of it.

BROWN: Of course, it was.

WALTERS: OK. Let's talk about the president's State of the Union.

OBAMA: "I know it's an election year. And after last week, it is clear that campaign fever has come even earlier than usual."

WALTERS: Do you see any evidence in his speech that he got a message from your election?

BROWN: On some issues, yes. I was encouraged that he was interested in doing, you know, nuclear power and doing some limited drilling under the proper circumstances. I felt his position on pointing out that Iran is certainly a very serious issue, and I'm hopeful that I can work with him on that.

I thought how he's handling, obviously, Afghanistan -- I was very vocal in supporting his position on increasing the troops. I was encouraged by the fact that he's going to do a freeze on spending and, more importantly, also look at, you know, tax reductions.

But I think we need to a little bit bolder. We need to make sure that we get a handle on spending and taxation.

WALTERS: President Obama has asked for a spending freeze on almost everything except matters like the military, Social Security, and Medicare. He says he's going line by line through the budget. Now, you have said that's not enough for you; that you want to cut spending and not just freeze it.

So what are the first 3 items that you would cut?

BROWN: The problem with what the president said is he's not doing it until 2011. We need to do it immediately. We need to put a freeze on federal hires and federal raises because, as you know, federal employees are making twice as much as their private counterparts.

I'm in favor of, you know, Judd Gregg's proposal, the bipartisan effort, almost like a BRAC closure...

WALTERS: Which was defeated.

BROWN: ... the base closing. And I thought the president did the right thing by saying through executive order he's going to bring it up. I would have supported the ability for him to do that.

WALTERS: On Friday, President Obama announced what he called the "best way to promote hiring," talking about jobs especially for the small businessmen. A $5,000 tax credit for each new employee added and tax relief for those companies that add to their payroll. A total cost is
$33 billion dollars.

If and when this became a bill, would you vote for it? Yes or no?

BROWN: Yes.

WALTERS: Health care. Massachusetts requires that all residents purchase health insurance. You voted for that plan.

BROWN: Sure.

WALTERS: So why doesn't it make sense that all Americans have health insurance? Why isn't what's good for Massachusetts good for the whole country?

BROWN: In Massachusetts, the free market, the free enterprise has taken control, and they're offering a wide range of plans. I've never ever said that people should not get health insurance. It's just a question of if we're going to take a one-size-fits-all government plan or we're going to do something where the individual states can tailor their plans as we've done.

WALTERS: Do you think the whole plan should be scrapped?

BROWN: Yes.

WALTERS: The whole plan?

BROWN: Yes.

WALTERS: You don't...

BROWN: We need to go back to...

WALTERS: ... see that there could be some things that could be -- goodbye to the whole plan?

BROWN: I think it was on its last legs before I even got elected, because the Democrats even were upset at the backroom deals, for example, in Nebraska. And they want a chance, I believe, based on just what I'm hearing -- and I can't -- I'm not going to quote anybody directly -- that to go back to the drawing board and do it in a transparent, bipartisan manner --that's the big difference between Massachusetts and Washington.

WALTERS: And then would you want it state by state?

BROWN: I have to see what's being proposed. A lot of states want that flexibility. They do not want the federal government always being in their business saying you have to do it this way, this way, and this way.

But other states may not have that ability. They may want more government involvement.

WALTERS: There has been a good deal of criticism of President Obama's economic team. Chairman of the Fed, Ben Bernanke, was, after a great deal of…

BROWN: I would have supported him.

WALTERS: You would have?

BROWN: Yes.

WALTERS: Well, he had a lot of criticism, but he's in. OK. Now, Treasury Secretary Tim Geithner is on the hot seat. Should Tim Geithner be replaced?

BROWN: The president has to work with the people he feels most comfortable with, as I do in my own staff -- as you do with the people that are here.

And I think that if he feels comfortable with -- with Tim, then he -- he should keep him.

WALTERS: You have been a member of the National Guard for 30 years. You've talked about how important that service is.

BROWN: Yes.

WALTERS: You're a Lieutenant-Colonel. On Wednesday the president announced that he wants to work with Congress to repeal don't ask, don't tell. What's your view?

BROWN: I think it's important, because as you know we're fighting two wars right now. And the most -- the first priority is to -- is to -- is to finish the job, and win those wars. I'd like to hear from the Generals in the field -- in the field -- the people that actually work with these soldiers to make sure that, you know, the social change is not going to disrupt our ability to finish the job and complete the wars.

WALTERS: But Senator, your own view.

BROWN: That's my view.

WALTERS: So you can't say whether you're for or against it?

BROWN: No. I'm going to wait to speak to the generals on the ground.

WALTERS: President Obama said that in the last year there are more Al Qaeda terrorists including leaders captured or killed than in 2008. Now, obviously there are incidents like the one on Christmas day. Do you think that the president has made the country more safe?

BROWN: I think -- I think -- I don't think it's just about the president. It's not his job. His job is to be our leader, and he delegates to the appropriate authorities to make those decisions.

So I'm not going to give him a grade and say who did -- President Bush or President Obama -- who did the better job. I just want them to continue to do a good job, and I want to be able to provide, you know, my knowledge and my energy to helping.

WALTERS: You know, as we've been talking, you've expressed several time the idea of working together, Republicans and Democrats working together, and your knowledge helping the president. Do you feel now that there is going to be this kind of cooperation or reconciliation?

There's so much -- there's been so much anger and so much conflict. Do you think it's going it change?

BROWN: Well, it happens in many presidencies. This isn't the first. The fact that the number is a 60-40 number has certainly contributed to that, you know, head-banging. So I'm hopeful. What I'm sensing from people is, yes, in fact, there is a new sense of openness and cooperation. I mean, has the president met with the Republican delegation before? I don't think so.

WALTERS: But is it in part because of your election?

BROWN: I think so.

WALTERS: So your election may bring the two parties closer together?

BROWN: And I hope I'm on the front of the line, you know, leading the charge because we have some very serious issues affecting our, you know, jobs, our economy. We need to be not only the world's military leader but also its economic leader.

And if we're not either one of those, then we're going to have troubles.

WALTERS: So not just for you personally, but 41 has been a good number. Yes?

BROWN: Well, it's been a great number for the country. It's been a great number for the country, and I'm so -- I'm so invigorated to get down there and just work together.

WALTERS: You know, you replaced a beloved figure.

BROWN: Yeah, he was a great guy.

WALTERS: How do you think that Senator Ted Kennedy would feel about your election?

BROWN: Well...

WALTERS: Do you think he'd be disappointed?

BROWN: Well, we had a relationship prior to this, and he was always very friendly and always would ask who's the better singer, my daughter or me. I know when I spoke to his wife, she was the first person I called. And I -- she was -- she was very gracious and appreciative. So I'll leave that up to, you know -- if he's watching, I'll, you know, maybe he'll kind of let us know how he feels.

WALTERS: I'd like to talk a little bit about your growing up, your youth. Your parents divorced when you were a year old. Each –

BROWN: I'm not going to cry, by the way. OK. Just...

WALTERS: How do you know I'm not going to make you cry?

BROWN: (LAUGHS).

WALTERS: I'm not going to try to, Senator. OK?

BROWN: OK.

WALTERS: Each of your parents were married four times, and you've described them as having a violent marriage. At one point, you talked about when you were five or six years old having to feel you had to save our mom, and your dad wasn't around very much. Difficult childhood.

How did this shape you?

BROWN: Well, first of all, my parents were both loving, and they still are. When they were divorced, I was one years old, but they were always there for me. When I referred to the violence in the home, it was with my mom's husband -- a couple of husbands. And I do remember getting up in the middle of the night and, you know, having to be the man of the family and come and rescue her and getting knocked around pretty good.

And it's made me appreciate my strong family and the fact that I have two great kids. I'm not going to cry. And, you know, I've learned from my parents' mistakes to do everything that they may have done wrong.

WALTERS: In an interview to the Boston Globe back in 1982, you said, "Sometimes...

BROWN: Marian Christy, if I'm not mistaken.

WALTERS: Yeah. "Sometimes, I think I'm being tested by a higher being. When things are going great, I think of it as a reward from heaven."

Do you still think your winning is a reward from heaven?

BROWN: Obviously, I was 22 years old there and thrust in the spotlight because of what I did with the Cosmo thing.

I believe in God, and I am very thankful for the things that I've, you know, been blessed with. Is there -- is there a higher being that's looking out for people? I hope so. I'm hopeful.

WALTERS: The Cosmopolitan Magazine. Well it just so happens, I have it.

BROWN: Great. I'm sure you do.

WALTERS: Yeah.

BROWN: Really? You're kidding, right?

WALTERS: Here. I really do. I have the magazine.

BROWN: Oh, yeah. The good old days. Do you want me to sign it?

(LAUGHTER)

WALTERS: Actually -- I want you -- well, it's a thought. I could -- I could then sell it for a lot.

BROWN: Yeah. Yeah. Yeah.

WALTERS: But this is...

BROWN: Yeah.

WALTERS: ... the actual picture.

BROWN: Yes.

WALTERS: It's a -- it's a...

BROWN: I wish I still looked like that.

WALTERS: Well I'm not going to ask you to prove it. But this is pretty -- this is pretty raw stuff. OK. So...

BROWN: That's Cosmo -- 1982 Cosmo. Let's not get carried away here.

WALTERS: But at the economic conference in Davos, some of the foreign leaders -- that just took place last week -- were referring to you as that "nude magazine guy."

(LAUGHTER)

WALTERS: Were you worried -- or are you worried that this can make you a little bit of a joke?

BROWN: No. I was 22 years old. My -- my grandmother saw it. She laughed. You know, you have to have a sense -- have to have sense of humor about yourself. It wasn't Playgirl. It was Cosmo. You know being Bert Reynolds -- Arnold Schwarzenegger, John Davidson, David Hasselhoff also did it. And I'm the -- the only non, you know, famous person who did it back then.

WALTERS: What would you say if one of your daughters came to you and said, "Dad I want to pose nude?"

BROWN: Well I would leave it up to their discretion. I don't think that's in the -- in the cards though.

WALTERS: You know some women have said to me, "If a woman did a nude centerfold spread" -- even if it was more than 20 years ago -- they're not sure that she would be elected senator, because there's a double standard. What do you think?

BROWN: I think if someone is qualified, regardless of what they did in their youth -- we all make mistakes. I'm not perfect. And do I regret doing that? No. Cause if I hadn't done that, I never would have been sitting here with you. It's all connected. So is there a double standard? I hope not. If someone is qualified to do the job, they should be able to do it, regardless of what they've done in their past.

WALTERS: Let's talk about your daughters. In that victory speech…

BROWN: "In case anyone who's watching throughout the country they're both available. No, no no. No. Only kidding, only kidding."

BROWN: Pow.

WALTERS: Oh, I'll bet. I'll bet.

(LAUGHTER)

WALTERS: Well one isn't available.

BROWN: No. No. Her boyfriend was mad at me. But she -- she's good.

WALTERS: Your daughter, Ayla was a contestant on American Idol...

BROWN: Yes.

WALTERS: ... in 2006, at which time Simon Cowell described her
performance as...

BROWN: Robotic.

WALTERS: You remember. Robotic, and empty.

BROWN: Yes.

WALTERS: Here's your chance. What would you like to say to Mr. Cowell?

BROWN: I'd love to have him have her on the show again because she's grown as well. She was 17, and she had never even put on makeup until she walked in the American Idol studios.

WALTERS: So you're asking him to please give her another chance?

BROWN: I've love them to get together and have her get on "Idol" again. I think it would be great for her. It would be great for the show and let people know that there's life after "Idol." Sure.

WALTERS: Well, there we go. We'll see if we get an answer from him.

BROWN: Ayla actually respects Simon greatly about his critiquing even though he's kind of harsh, what he says -- if you actually listen to what he says, it was right.

WALTERS: Senator, I have one final question. You and this beloved truck…

BROWN: "I have 202,277 miles (laughter).The thing runs great too. I haven't had any trouble with it."

WALTERS: Will you be getting a new truck?

BROWN: I think I'll eventually have to. I know American products are really good, but they eventually do wear out. I'm going to bring it down to Washington and use it as long as I can. It's a great truck. I live in the thing.

WALTERS: Its days are numbered.

BROWN: I live -- I mean, I change in it. I sleep in it. I eat in it. It's who I am. It's -- I'm just -- you know, I never thought the truck would be such a national symbol of freedom.

WALTERS: I appreciate your doing this.

BROWN: Thank you.

WALTERS: Thank you very much.

WALTERS: Well, now let's bring in our roundtable. George Will,
Arianna Huffington from "The Huffington Post," Paul Krugman, Nobel Prize
winning economist and columnist for the "New York Times," and Roger
Ailes. And this is rather unusual for us and I think for him because
Mr. Ailes is the CEO and president of FOX News and this is his first
visit with ABC News on "This Week."

AILES: I was waiting for HD. I look so much better.

WALTERS: I also -- you just said that when Scott Brown for $1,000
for the cosmopolitan nude photograph, you would have done it for less.

AILES: 1982, the guy's getting out of college and someone gives him
$1,000 and he can cover himself up. I don't know, $100, I'd do it.

WALTERS: We're not going to ask you today. OK, so here we go,
George. Scott Brown. What do you think of him? How influential do you
think he's going to be?

WILL: He is one percent of one-half of one of our three branches of
government. That is he's one senator in an institution where like most
institutions, 80 percent of the work is done by about 20 percent of the
people. Most of them senior senators.

Furthermore, as he said in his interview, every Republican senator
is the 41st senator, therefore every one of them is a potential
obstructionist or extortionist, depending on what you say. So in that
sense, I think he will be of modest historic importance.

WALTERS: So why the fuss, Paul?

KRUGMAN: Well because we have a super majority system. Because we
have a system in which you cannot at this point get anything done
without 60 points in the Senate. I mean, what I've been thinking about
right now is at this point, the House of Representatives has passed a
health care bill and has passed a strong financial reform bill. It has
passed a strong climate change bill. In any other advanced democracy,
that would mean that all of these things would have happened. But in
the U.S. system, it takes 60 votes in the Senate to accomplish anything
and because the Democrats nominated somebody in Massachusetts who didn't
know her Red Sox, that entire agenda has run aground -- incredible.

WALTERS: That was his opponent.

KRUGMAN: And it's important. Let me just say on health care, that
was the most evasive answer. If you think this is a straightforward
guy, that was an incredibly evasive answer on health care because the
Senate bill, which has now stalled, is identical to the Massachusetts
health care plan, the same thing. Only in the finest of fine print is
there any difference. He voted for the Massachusetts plan. A majority
of voters in Massachusetts who voted for him approve of the
Massachusetts health care plan. Nonetheless, their plan is dead.

WALTERS: And he's going to kill this.

HUFFINGTON: But there were many symbolic things why his election
was important. He's a manifestation of the mistrust of both political
parties. He ran as an outsider. He ran as a Scott Brown Republican, as
he told you. Of course, that's selfish. He's already morphing into a
conscious politician and both in his answer to health care and his
answer to Don't Ask/Don't Tell, when he wouldn't tell you which way he
would go. So what is fascinating is to see really how much distrust
there is, the president called it the deficit of trust in his State of
Union. And he really capitalized on that. And now when he comes to
Washington, let's see how quickly he becomes an insider. This happened
to Obama. Remember he was a fresh face who was going to change things
and the special interests have won, at least for round one.

KRUGMAN: Can I say just one more thing? Voters still think they're
voting for individuals. They voted for Scott Brown because they felt
they liked Scott Brown, but in fact, they're voting for parties. The
only thing that matters about a candidate right now is whether it's a
"D" or an "R" after his or her name. But voters haven't caught onto
that. And that's part of what just happened.

WALTERS: That's why he's also saying, "I'm a Scott Brown Republican."

KRUGMAN: But he is, he's a Republican Republican.

AILES: That's partly true, but I think people are misinterpreting
elections, I think President Obama misinterpreted his election. I think
people could misinterpret this election, conservatives getting too
excited about this guy being with them and I doubt he's really a
moderate. People tend to misinterpret elections. The president brought
that radical change to the United States as to what it was about, and it
was actually about we're tired of watching George Bush on television for
eight years. He hasn't gotten the positive article in seven years and
we've got two wars on, it's time to fix it and I think that Obama ran
very carefully against George Bush and the beach was already softened up
in those old World War II movies that the Navy goes in and softens up
the beach and then somebody comes along and lands.

So I think that we tend to overinterpret these things. I think he's
a very soft-spoken, interesting guy. Let's see what he does.

WILL: Let me respond a bit to Paul's disapproval of the 60-vote
supermajority. The Republicans didn't invent it. The Democrats have
used it with great vigor, and will probably want to do so again when the
Republicans control the Senate.

Yes, the Senate is different from the House. The founders planned
it that way.

I know of nothing, Paul, that the American people have wanted
intensely and protractedly that they didn't eventually get. What the
Senate does is slow things down, and we have more to fear from
government haste than from government tardiness.

KRUGMAN: Well, I would say if you look at the charts, it's just not
true. The filibuster has vastly increased in importance. It was not
always thus. What you think of as a time immemorial institution is
actually something that came into existence only in the last 15 years or
so. And it was never as intense as it is now.

WILL: It came into existence in the '90s.

WALTERS: We're going to come back, and we have much more time to
talk about this, but we're going to have to pause. But before we do, in
the interest of full disclosure, that Cosmopolitan picture that you saw
of Scott Brown, well, to my amazement, in the same issue, is...

(UNKNOWN): Barbara Walters. There we go.

WALTERS: But (inaudible) dressed. There we go. There we are.
OK? So much for that.

Now, when we come back, back to more serious subjects with all of
you. We'll be right back.

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

OBAMA: They didn't send us to Washington to fight each other in
some sort of political steel cage match.

(UNKNOWN): From your administration, there have come statements
that Republicans have no ideas and no solutions.

OBAMA: If you were to listen to the debate, you'd think that this
thing was some Bolshevik plot.

(UNKNOWN): Will that new budget, like your old budget, triple the
national debt?

OBAMA: It's very hard to have the kind of bipartisan work that
we're going to do, because the whole question was structured as a
talking point for running -- running a campaign.

(END VIDEO CLIP)

WALTERS: That was President Obama appearing before House
Republicans at their annual retreat on Friday, an unusually open and
honest back-and-forth, and we'll talk more about that with our
roundtable. George Will, Arianna Huffington, Paul Krugman, and Roger
Ailes, who is chairman and CEO of Fox News.

Roger, just let me begin with you. You have had your own
back-and-forth with the White House. They were not very happy with you,
banned you for a while. Have you kissed and made up? Is it hunky-dory?

AILES: Well, they tried to ban us. They tried to break the pool,
but the other networks stepped up and protected Fox on it, because it
was tortuous (ph) interference with a contractual relationship and sort
of tramping around on the Constitution...

WALTERS: But now you're OK.

AILES: We're fine. I mean, we were -- it was not as bad as it was
played, and things are not as great (ph) as they should be, but we have
a good dialogue. And I saw the president and his wife at the media
Christmas party. They were very gracious, very nice, both of them. And
we have a dialogue every day with them.

WALTERS: Aw, shucks. It was more fun the other way.

AILES: Well, I'll pick a fight if you want. I mean, I'll be happy
to get into one.

(LAUGHTER)

AILES: But I think there will be others. We have differences, but...

HUFFINGTON: Well, Roger, it's not a question of picking a fight.
And aren't you concerned about the language that Glenn Beck is using,
which is, after all, inciting the American people? There is a lot of
suffering out there, as you know, and when he talks about people being
slaughtered, about who is going to be the next in the killing spree...

(CROSSTALK)

AILES: Well, he was talking about Hitler and Stalin slaughtering
people. So I think he was probably accurate. Also, I'm a little....

HUFFINGTON: No, no, he was talking about this administration.

AILES: I don't -- I think he speaks English. I don't know, but I
mean, I don't misinterpret any of his words. He did say one unfortunate
thing, which he apologized for, but that happens in live television. So
I don't think it's -- I think if we start going around as the word
police in this business, it will be...

HUFFINGTON: It's not about the word police. It's about something
deeper. It's about the fact that there is a tradition as the historian
Richard Hofstetter said, in American politics, of the paranoid style.
And the paranoid style is dangerous when there is real pain out there.
I mean, with...

AILES: I agree with you. I read something on your blog that said I
looked like J. Edgar Hoover, I had a face like a fist, and I was
essentially a malignant tumor...

HUFFINGTON: Well, that's...

AILES: And I thought -- and then it got nasty after that...

HUFFINGTON: ... that was never by anybody that we had...

(CROSSTALK)

AILES: Then it really went nasty, and I thought, gee, maybe Arianna
ought to cut this out, but...

(CROSSTALK)

WALTERS: While we are talking about that, the president -- I'm just
going to talk to you about this a little later, but this -- if -- the
president has said in the state of the union and when he was talking to
the Republicans that there is a cynicism about the media, that he calls
it slash and burn, and that we are to blame for a lot of the discontent
and the rage in this country. Are you to blame?

WILL: I don't think so. There is cynicism and there is rage, but
the vast swath of the American people are temperate, good-natured people
who aren't actually thinking about us in Washington as much as we wish
they were. But the president himself, when he gets up in front of the
Congress and delivers a sermonette on the deficit of trust in
Washington, should not, A, flagrantly mischaracterize the Supreme Court
decision. I don't know whey he thought it was in his interest to pick a
fight with the most prestigious institution in Washington. He should
not in the same sermon on trust say he has proposed to freeze on
government spending when he has proposed a selective freeze on one-sixth
of the federal budget. He should not say I'm all for expanding trade
with South Korea, Panama and Colombia when he won't move the existing
agreements to ratify trade with them.

So I don't think that when a man gets up and gives a speech full of
cognitive dissonance, saying Washington is corrupt, Washington is
annoying (ph), Washington is tiresome, Washington is dysfunctional, and
Washington should have a much bigger role in American life, I think that
-- that breeds, you might say, a kind of distrust and cynicism.

WALTERS: (inaudible) slash and burn....

KRUGMAN: If I can just -- you know, what bothers me is not the
nasty language. Glenn Beck doesn't, you know, it's not -- what bothers
me is the fact that people are not getting informed, that we are going
through major debates on crucial policy issues; the public is not
learning about them. And you know, you can say, well, they can read the
New York Times, which will tell them what they need to know, but you
know, most people don't. They don't read it thoroughly. They get -- on
this health care thing, I'm a little obsessed with it, because it's a
key issue for me. People did not know what was in the plan, and some of
that was just poor reporting, some of it was deliberate misinformation.
I have here in front of me when President Obama said, you know, why --
he said rhetorically, why aren't we going to do a health care plan like
the Europeans have, with a government-run program, and then proceeds to
explain whey he's different. On Fox News, what appeared was a clipped
quote, "why don't we have a European-style health care plan?" Right,
deliberate misinformation.

All of that has contributed to a situation where the public...

AILES: Wait a minute, wait a minute...

KRUGMAN: I can show you the clip, and you can...

(CROSSTALK)

AILES: The American people are not stupid...

KRUGMAN: No, they're not stupid. They are uninformed.

AILES: If you say -- if (inaudible) words are in the Constitution,
if the founding fathers managed -- they didn't need 2,000 pages of
lawyers to hide things, then tell, then tell...

KRUGMAN: Oh, come on. Legislation always is long.

AILES: ... then tell people it's an emergency that we get it, but
it won't go into effect for three years. So you don't have time to read
it, you...

(CROSSTALK)

KRUGMAN: People, again, this was a plan that is -- it's actually a
Republican plan. It's Mitt Romney's health care plan. People were led
to believe that it was socialism. That's -- and that was deliberate.
That wasn't just poor reporting.

(CROSSTALK)

HUFFINGTON: There are two separate problems...

AILES: Let me ask you a question, just as an example...

(CROSSTALK)

HUFFINGTON: ... let me just answer that, because there is a problem
in the fact that there wasn't a plan. There wasn't a plan that people
could understand. There were (inaudible) plans with a lot of
differences. But there is also a problem when it comes to the words
being used. Words matter. And words that are actually being used by
people we hire are different than the words that are being used by
commenters on our sites, like you mentioned.

(CROSSTALK)

AILES: But there are 300 million people who have a health care plan
that they are happy with. There are about 30 million people who don't
have a health care plan. So as an executive, what do you do? You go
fix the 30 million. You don't go over here and upset the apple cart for
300 million...

KRUGMAN: Which is exactly what the plan was.

AILES: No, no, no...

KRUGMAN: It was trying (ph) to leave the employer-based health care...

(CROSSTALK)

AILES: ... $500 billion away from old people.

(CROSSTALK)

WALTERS: OK, let me ask you, because (inaudible). Is the health
plan that took the president 34 minutes to get to the issue he spent all
his past year on, he says he's not giving up on health care. Is it dead?

WILL: Well, Chuck Schumer, who is a legitimate representative of
the mainstream of the Democratic caucus in the Senate, says his three
priorities, and the Democratic Party's three priorities this year, are
jobs, jobs and jobs. Rahm Emanuel, who is not always quoted accurately,
is quoted, however, as saying top three priorities are jobs, deficit
reduction, and financial regulation. What don't we hear? We don't hear
health care.

KRUGMAN: It couldn't have been. I mean, remember, both houses of
Congress have passed quite similar health care plans. There are ways to
make this thing happen. We know there's a legislative strategy, but it
doesn't work unless Obama gets behind it. In the 10 days after the
Massachusetts election were totally disheartening. That was the moment
when we needed some leadership from Obama and he just seemed to wander off.

WALTERS: Paul, dead?

KRUGMAN: You know, it's just possible, not completely dead. It
could be saved if the president wakes up. If just possibly Nancy Pelosi
and Harry Reid can make a way for this to happen, but it's not very likely.

HUFFINGTON: The only way it can be saved is if the Democrats decide
to follow Senator Harkin with his reconciliation sidecar. That's the
only way this could be saved. But to George's point, they're all saying
it's jobs, jobs, jobs. But when it comes to the State of the Union, the
professors are not serious in terms of dealing with the jobs crisis. I
mean, all this little initiatives a la Bill Clinton in the '90s are not
going to work because this is not the '90s. This is a 17.5 percent real
unemployment.

WALTERS: Small business hiring someone new, and the tax cuts...

(CROSSTALK)

KRUGMAN: ... that is a good plan, but it is a $30 billion plan and
might create a couple hundred thousand jobs in the situation. We have a
8 million, 10 million job deficit. It is a very small plan. It is a
micro-policy.

WILL: It's also easily gamed, as you know by people will hire
people they wouldn't hire otherwise and get rid of them as soon as the
tax credit is gone.

HUFFINGTON: But most important, people have not really focused on
the crisis on the middle class. When Lehman Brothers collapsed,
everybody focused and they did unprecedented things. The middle class
is in real trouble. I mean, if you look at the latest Brookings report
about the rise of poverty in the suburb, about the fact now that we have
one in eight people whose mortgages are under water, who can't pay their
credit card bills, this is a major, major problem that the
administration is not seriously addressing it.

WALTERS: Let me ask you something, Roger, because when you worked
for President Nixon, you helped to get him in the White House. You're
credited for doing that.

AILES: Well, I was a television producer, not a politician, but
yes. The back light was in the right place.

WALTERS: What advice would you give to Barack Obama?

AILES: I think he's in a very tough spot. He is enormously likable
and I think despite what everybody says, people would like him to
succeed. But he came in with the belief that the radical change he
wanted or what some people say is a radical change that he wanted would
be widely accepted.

WALTERS: But give him some advice, boom, boom, boom now.

AILES: The first advice I'd give him is listen to everybody and
then go in a dark room by yourself, because in the end, it's all going
to happen in your brain. If you actually believe all these things that
you're for, and Richard Neustadt in "Presidential Power" explains that
the only real presidential power is the power to persuade the people, to
be open, to go out to them and say this is the reason I believe this,
this is the direction I believe the American people should go. If he
doesn't do that and I don't think he can sell some of his programs. I
think he has to become president of all the people and I think he's got
to go to transparency and I think you'd be surprised. People who are
willing to give him the benefit of the doubt, but you can't do this in
back rooms surrounded entirely by political consultants.

HUFFINGTON: Can I give him some advice too? He should go back and
listen to his speeches during the campaign because in Denver, he said
the greatest risk we can take is to play the same game, surrounded by
the people, and he's doing that. Surrounded by Larry Summers and Tim
Geithner and the same people who basically were part of the ...

(CROSSTALK)

HUFFINGTON: Definitely Geithner should be out and ...

KRUGMAN: I don't think Tim Geithner is the problem. The problem is
that Tim Geithner, going back to something earlier, he and the president
are soul mates. They both have the view of essentially incrementalist
tinkering of the edges and Obama needs to have a view that he's really
going to take on. I think financial reform could be an issue where he
can recapture some of the sense of being an outsider, some of the sense
of running against business as usual. The Republicans will make that
easy for him because they are going to be dead set against any kind of
financial reform. They will vote not a single vote for any realistic
curbs on Wall Street. But he has to find that fire in himself. It's
not a question of replacing Tim Geithner, it's a question of replacing
his own tendency to think well, you know, let's just stabilize things a
little bit.

WALTERS: What about the freeze, the fear of freeze and the $20
billion in budget cuts? Is that going to work?

KRUGMAN: It's junk fiscal policy, it is junk economics. We all
know that.

(CROSSTALK)

KRUGMAN: It's not all that important. It's 15 percent of the
federal budget. It's -- the Center for American Progress, which is a
think tank that is very closely tied to the administration, one week
before the State of the Union had an article about how you can tell
people who are phony deficit hawks, what they call deficit peacocks.
And they advocate things like a freeze on non-defense discretionary
spending...

HUFFINGTON: And they called him a deficit peacock.

KRUGMAN: And they called the president -- no, it's pure stunt
making, and worse, it's a Republican talking point. It's a Republican...

(CROSSTALK)

KRUGMAN: ... policy.

HUFFINGTON: Actually, it's one point on which everybody agrees. I
just came back from Davos, and everybody, including Niall Ferguson, who
doesn't agree with Paul on anything, called it a joke. I mean, and
talking about breeding cynicism -- it's these kind of measures that
breed cynicism, that make people feel that politicians are just reading
focus group tests and acting on them.

WILL: Paul has been consistent, here and elsewhere, for many
months, saying the big danger is 1937, when we got a recession within a
depression, because in Paul's judgment and some others, the government
flinched, that it declared victory prematurely.

Now, Paul would like a bigger, better stimulus program. Paul's
administration won't even use the S word, stimulus is so out of favor.

KRUGMAN: There's only so much politically that Obama can do to
create jobs, because he doesn't have a political capital now. This is,
you know, early on in the administration, I was frantic, saying, you
have to go big, because you are going to get one shot at this, and they
didn't. And so that's -- that is where we are now.

But now to buy into the notion that we're going to start reducing
the deficit when the unemployment rate is still at 10 percent, is a very
bad thing.

AILES: Jobs is the second issue, in my view.

WALTERS: What's the first?

AILES: Safety and sovereignty of the United States, and I think
people, when they see a guy get all the way over Detroit to (inaudible)
his underpants, but he could have, and now we're in a situation where
we're going to have to either -- we took everybody's shoes off; now
we're going to have to take everybody's underpants off. But the fact
is, that's not going to stop. We've got to get much tougher. We've cut
the hands off the CIA. We can't -- it's the Norwegians that are doing
this. We know who it is. We can't seem to say it. So sooner or later,
we're going to have to toughen up on all this stuff. And the American
people know it, they feel it, and they're worried about it.

WALTERS: Let me just go around for our last moments. The state of
the union. Did the president -- people seemed to think in general that
it was a good speech. Did he get his footing back? Did it make a
difference? Yes, no?

WILL: State of the union addresses rarely make a great difference.
They have a captive audience, but the audience is usually unmoved.

WALTERS: Arianna?

HUFFINGTON: They focus-group tested it within an inch of its life.
You know, there was an applause line for every constituency, and his
grand vision, which got him elected, was really missing. As the New
York Times call it, it's the opposite of bold.

KRUGMAN: The give-and-take with the Republicans was what the state
of the union should have been. That was where...

WALTERS: Did that make a big difference?

KRUGMAN: It made some difference. The president said that the
Republicans of the party have no ideas, and they demonstrated it on the
spot, that they are in fact the party of no ideas. That's where he
needs to go.

WALTERS: What do you think?

AILES: I thought he did a pretty good job of delivering his
speech. He seemed to get a little bit of his energy back. He'd fallen
away over the last few months. You know, he did some dumb things, like
take on the Supreme Court. But the media saved him and blamed it all on
Alito. But you know, that speech, he's got to follow it up with his --
look, there is an easy way to get it done. I went to the White House
one night because I had to meet with Ronald Reagan. And there was a lot
of laughter down at the end of the hallway. I waited about 10 minutes,
and out came Reagan and Tip O'Neill, arm in arm, with a drink in their
hand, telling Irish jokes. In the paper the next day, they kind of
trashed each other's ideas, but they obviously cut some kind of a deal.

And that's, you know, there are ways. If he wants to invite the four
Republicans and four Democrats over to the Super Bowl and say, come on,
guys, we've got to get some jobs...

(CROSSTALK)

HUFFINGTON: He tried to do that. He wasted three months...

AILES: No, that's the way it gets done.

(CROSSTALK)

HUFFINGTON: He wasted three months trying to get Chuck Grassley to
agree to what Max Baucus was trying to do. So he's tried that again and
again and again.

AILES: He's tried to get Republicans to agree with him, there's no
question. And the media will report that -- what they say is a
Republican is evolving, as if he's a caveman if he leans towards the
president on something.

WILL: In Baltimore, at the meeting that Paul liked, the president
said "I read your bills." To most Americans, it was news that the
Republicans had bills. But in fact, he got engaged in a dialogue with
Paul Ryan of Wisconsin. If he'd met Paul Ryan halfway, you'd have
health care soon.

WALTERS: I just want to ask, in the few seconds we have left, Sarah
Palin is now on your payroll. OK? 2012, presidential candidate?

AILES: I have no -- no idea, no idea whether she even wants to. I
don't think she -- she knows. I mean, everybody hates her who's ever
written a book because they didn't sell many. She wrote a book and it
sold two million in two weeks, and so now they hate her, they have a new
reason to hate her. I don't know...

WALTERS: But you hired her to be a commentator. Do you think -- so
you must think she has some qualifications? She seems to be very
popular with certain groups. Do you think she has the qualifications to
be president?

AILES: FOX News is fair and balanced. We had Geraldine Ferraro on
for 10 years as the only woman the Democrats ever nominated. Now we
have the only woman that the Republicans nominated. I'm not in
politics, I'm in ratings. We're willing.

HUFFINGTON: Roger, you clearly are in ratings, but if you are in
ratings, can you explain to me why FOX went away from the meeting the
president was having in -- why did you go away, 20 minutes before the end?

AILES: Because we're the most trusted name in news.

HUFFINGTON: OK and on that note...

WALTERS: I thought we were the most trusted name in news.

AILES: And we believe two liberal polls have now proven it.

(CROSSTALK)

WALTERS: I've got to go. The Roundtable, as you've been listening
to, continues in the green room and ABCNews.com. I know you're going to
want to hear it and you can get political updates all week long by
signing up for our newsletter also on ABC.com. And coming up we have
"The Sunday Funnies."